Organisers of India's biggest literary festival said on Friday they feared for the future of the event after several high-profile writers read excerpts from Salman Rushdie's The Satanic Verses in support of the author. The novel is banned in India.

Rushdie was scheduled to appear at the festival in Jaipur in north-west India, but said on Friday he was pulling out after a warning that hitmen had been sent to "eliminate" him by an underworld crime boss based in Mumbai.

Following the announcement, British author Hari Kunzru, speaking on the festival's main stage, read a short passage from The Satanic Verses in front of a crowd of hundreds. Other authors followed, despite efforts by organisers to stop them. Kunzru used Twitter to state before the reading that he aimed "to defy bigots".

The Satanic Verses prompted outrage among many Muslim communities when it was published in 1988. Friday's protests could potentially carry a jail sentence for the readers and the organisers of the festival and allow authorities to close the event, which is expected to draw 60,000 visitors. Organisers, who include the British writer William Dalrymple, issued a statement stressing that Kunzru and the other authors acted without their prior knowledge or consent, and saying they would not tolerate any illegal action at the festival.

More than 250 writers are due to take part in the festival, including playwrights David Hare and Tom Stoppard and novelists Ben Okri and Michael Ondaatje. Oprah Winfrey is due to speak on Sunday.

Rushdie's decision to withdraw comes after two weeks of mounting uncertainty. Around noon on Friday, organisers read out a brief statement from the 64-year-old explaining that he had "been informed by intelligence sources … that paid assassins from the Mumbai underworld may be on their way to Jaipur to eliminate me".

Though Rushdie said he had doubts about the reliability of the information, which came from "intelligence sources" in India, the writer said: "It would be … irresponsible to my family, to the festival audience and to my fellow writers … to come to the festival in these circumstances."

The publication of The Satanic Verses led to a fatwa calling for Rushdie's death from the Iranian leader Ayatollah Ruohollah Khomeini, and forced the author to remain in hiding for many years.

The row over Rushdie's presence at the Jaipur festival was sparked by a call from a conservative Muslim cleric for the author, who he said had "hurt the sentiments of Muslims all over the world", to be banned from India. Islamic groups had planned protest marches during the festival this week. One organisation offered a reward for anyone who could hit Rushdie with a thrown shoe.

Indian officials told the Guardian they feared some action by groups run by Dawood Ibrahim, a well-known organised crime boss now living in exile, who they believe is closely linked to the Pakistani security establishment. Security experts, however, described the idea of killers being dispatched by organised criminals to kill the author as "extremely far-fetched".

The ailing Indian government, led by the centre-left Congress party, has made no public statement on the row. There are state elections in coming weeks in which the votes of Muslim communities will play a critical role.

Festival organiser Sanjoy Roy said there was a need in India "to question … why we continue as a nation to succumb to one pressure or another".

Rushdie previously attended the festival, Asia's biggest, in 2007 and frequently visits the country of his birth.

Dalrymple said Rushdie's writings had been caricatured. "Salman is a writer of enormous breadth. His … passionate engagement with Indian Islamic history shows he is far removed from the Islamophobe of myth. This is a great tragedy and we hope he will be able to come back again in the future," he said.

Sheikh Amir Ahmed, a hotelier who had travelled for 12 hours by train to spend the weekend at the festival, said the row had been stoked by unscrupulous politicians: "This anger is not felt by the common man," he said. "I am Muslim and with my fellows we are not too concerned. I would have been happy to see him here. I am a businessman but in my heart I am a poet."